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India’s Cash Ban: 'Watershed Moment' or Reckless Move?

November 08, 2017 9:18 AM

Anjana Pasricha

Supporters of India's main opposition Congress party tear toy currency notes and shout sloganS during a protest on the first anniversary of the Nov. 8 demonetization announcement, in Ahmadabad, India, Wednesday, Nov. 8, 2017.

Was Indian Prime Minister Narendra Modi’s move to scrap most currency overnight a year ago a “watershed moment” that helped clean up India’s economy or a “reckless move” that pulled down the world’s fastest-growing economy?

The contentious debate intensified on the anniversary of the measure as opposition parties held street protests calling it “Black Day”, while the government defended the ban on high value currency as a bold and ethical step to tackle the menace of corruption.

India's main opposition Congress party workers hold placards during a protest on the first anniversary of the Nov. 8 demonetization announcement, in Mumbai, India, Wednesday, Nov. 8, 2017.

The scrapping of 86 percent of the country’s currency last November led to huge cash shortages for nearly two months. Millions of ordinary Indians stood in serpentine lines outside banks, ATM’s ran dry, rural areas with limited access to banks faced a massive problem and the cash-dependent informal sector that employs 75 percent of the country's workforce reeled.

The government had billed the move as a strike against graft and terrorism, often funded with cash or counterfeit bills.

But critics have slammed it as one of the most disruptive economic measures attempted at a time when the economy was growing at a healthy pace.

Calling it a “reckless” move, former Prime Minister Manmohan Singh, said that “nowhere in the world has any democracy undertaken such a coercive move.” He said that demonetization had a huge adverse impact on small and medium businesses in the country.

India's main opposition Congress party supporters shout slogans as they arrive to join a protest on the first anniversary of the demonetization announcement, in New Delhi, India, Wednesday, Nov. 8, 2017.

A year afterwards, critics point to data that shows it failed to achieve its objective. Nearly all the abolished currency made its way back to banks defeating the government’s target of wiping out piles of untaxed bank notes.

Job losses

Estimating that about two million jobs were lost between January and August, the Center for Monitoring of Indian Economy called job losses one of the biggest costs of demonetization.

And as the economy turns sluggish, many of the tens of thousands who were laid off such as hawkers, vegetable sellers and laborers are still struggling to find jobs.

Growth has plunged to its lowest in three years costing India the tag of the world’s fastest growing economy, the economy grew by 5.7 per cent in the April to June quarter.

While the government argues that there were signs of a slowdown even before the ban, economists say that the currency ban contributed to the dip in growth.

However there is optimism that significant benefits will accrue in the long-term as the measure sent a message that the government was serious about curbing corruption.

N.R. Bhanumurthy with the National Institute of Public Finance and Policy in New Delhi says the measure will help make the economy more transparent
as the number of people paying taxes and those opting for digital payments increase.

“A few sectors like construction where cash had a major role, those sectors have taken a major hit, but if that can help in shifting this informal transaction to the formal transaction, going forward that would certainly help.”

That is what the government is highlighting. Calling the move a “watershed moment”, Finance Minister Arun Jaitley said it signifies the government’s resolve to cure the country from the “dreaded disease of black money.”

“Demonetization is not a solution to all problems but it has changed the agenda, ushering in a less cash economy, increasing numbers of tax assesees and squeezing terror funding,” he said.

India's main opposition Congress party workers hold mock bills of discontinued currency during a protest on the first anniversary of the Nov. 8 demonetization exercise, in New Delhi, India, Wednesday, Nov. 8, 2017.

Others say that these objectives could have been achieved without undertaking a move as drastic as the currency ban.

Political effect

While the economic impact of demonetization will be debated for years to come, the immediate focus is turning to its political impact as two states, including Modi’s home state Gujarat, head into regional polls.

Facing criticism, Modi has vowed to continue his campaign against graft in campaign rallies.

The shock move had strengthened the perception of Modi as a leader who is tough and willing to do what it takes to crack down on pervasive corruption. But whether that image perseveres will be tested during these polls.

Political analyst in New Delhi Ajoy Bose says there has been a rising tide of resentment against Modi in recent months as people cope with the after effects of the currency ban and a recent tax reform measure.

“Demonetization along with GST (Goods and Services Tax) seems to have got certainly a section of the population very agitated and very angry because over the past year things have not been going well for the trading community. We will have to see how this plays out electorally,” says Bose.